Evidence of matters in company books and records under s 1305 – displacing the presumption

Section 1305(1) of the Corporations Act 2001 (Cth) provides a statutory presumption that the books of a company (relevantly, its financial reports and records) are admissible and are prima facie evidence of any matter recorded in them. However, the statutory presumption can be rebutted by the company whose books may not correctly record the true state of affairs of the company. Once the presumption arises, the onus shifts to the company to rebut and displace the presumption with evidence.

Why is the provision important?

The provision is a very important tool for practitioners involved in debt recovery litigation, particularly for creditors and lenders whose debts are recorded in the books and records of a debtor company.

A creditor seeking to recover the debt recorded in the books of a debtor can rely upon the statutory presumption created by s 1305 of the Corporations Act 2001 (Cth) that the debt recorded in the books of the debtor company is prima facie evidence of the debt. By doing so, the creditor can shift the evidential onus to the debtor to establish, by evidence, that the debt referred to in the book of the company does not reflect the true state of affairs of the company. This presents particular difficulty for debtors whose debts are recorded in the financial statements of a company (which are declared by the directors to be true and correct). However, there is greater scope for the presumption to be displaced in the case of other ‘records’ of the company (such as general ledgers or other book entries) which are not final reports, and which do not disclose the true state of affairs of the company.

In a recent decision by the Supreme Court of New South Wales in Wollongong Coal Ltd v NRE Resources Pty Ltd; NRE Resources Pty Ltd v Wollongong Coal Ltd (No 2) [2017] NSWSC 1552 (delivered on 16 November 2017), an alleged debtor company successfully displaced the statutory presumption under s 1305 of the Corporations Act that its loan account recorded in its general ledger was prima facie evidence of the amount of the loan amount due.

Facts

The plaintiff, Wollongong Coal, was a publicly listed company on the ASX which operated two underground coal mines. The plaintiff and the defendant, NRE Resources Pty Ltd were members of the Gujarat Group, an Indian coal producer. While Wollongong Coal and NRE Resources were members of the Gujarat Group, each had a loan account with the other. Significant sums of money were lent back and forth between the companies. The closing balance of the loan account as at 27 September 2013, recorded in NRE Resources’ General Ledger, showed that approximately $3.62M (Claimed Amount) was owed by NRE Resources to Wollongong Coal.

Proceeding and contentions by the parties

Wollongong Coal commenced proceedings to recover the Claimed Amount. It relied solely on the general ledger of NRE Resources which showed the net amount of $3.62M was owed to Wollongong Coal, and the presumption created by s 1305 of the Corporations Act in order to recover the Claimed Sum.

NRE Resources denied it was indebted to Wollongong Coal. It asserted that the general ledger did not record the true state of affairs of the company. As the onus of proof shifted to NRE Resources to displace the presumption, NRE Resources tendered evidence to argue the general ledger did not take into account a series of transactions on the following basis:

US$5M was paid by Wollongong into an account in the name of NRE Resources with a bank as partial security for an advance of US$25M that the bank was about to make to Wollongong Coal;

NRE Resources charged the US$5M in favour of the Bank;

Wollongong Coal defaulted under the loan; and

the Bank appropriated the US$5M.

NRE Resources asserted that it had in effect discharged Wollongong Coal’s indebtedness to the bank in the amount of $5M, which had not been recorded in the general ledger of NRE Resources, and this should be found by the Court for the purposes of dismissing Wollongong Coal’s claim (and giving judgment to NRE Resources on its cross claim for the difference between the Claimed Amount, and the US$5M it paid to the Bank in discharge of Wollongong Coal’s debt).

The decision

The Court accepted NRE Resources’ claim and held that the statutory presumption of the prima facie debt of $3.62M recorded in NRE Resources’ general ledger had been displaced. The Court held that although the general ledger recorded the $5M advance from Wollongong Coal to NRE Resources, it did not record, or reflect, the effect of the payment by NRE Resources of that sum to the bank in discharge of Wollongong Coal’s obligations to the bank. Accordingly, the Court held that the true state of affairs between the two companies must take account of the fact that NRE Resources had discharged part of Wollongong Coal’s obligation to the bank. Stephenson J held that rather than NRE Resources being indebted to Wollongong Coal in the amount of the Claimed Amount in the general ledger, Wollongong Coal was indebted to NRE Resources for the net amount that reflected the payment it made to the bank.

Analysis

Section 1305 of the Corporations Act is an important evidential tool for practitioners seeking to recover (and defend) debts owed by or to companies. The provision assists creditors by shifting the onus onto a debtor company to establish that matters recorded in their books do not correctly record the true state of affairs (which can be an important strategic advantage for creditors, particularly if the debt is recorded in signed financial statements that leave directors little room to move). However, the provision has limitations, particularly if the debtor company can establish with evidence that other books (such as general ledgers or accounting records) relied upon by the creditor do not record the true indebtedness of the company, particularly by reference to other transactions which are not recorded (or recorded properly).